Darden Remains Neutral - Analyst Blog
08 Aprile 2011 - 2:15PM
Zacks
We maintain our long-term Neutral
recommendation on Darden Restaurants Inc. (DRI) on
a host of factors.
Darden’s strong value
proposition, menu improvements, extensive advertising and excellent
unit-level execution with differentiated brands position it well
for growth. The company’s value-for-money entrees give it an
advantage in the highly competitive casual dining industry.
Darden is one of the few casual
dining chains that expanded during the economic downturn and tried
new concepts to enhance top-line growth. The company expects to
open 70 to 75 net new restaurants in fiscal year 2011. Despite the
sluggish economic revival, management’s consistent unit opening
affirms its confidence on fundamentals. Darden presently estimates
19% earnings growth year over year as compared with 17–18%
projected previously. We also remain optimistic on the development
agreement to set up of 60 restaurants in the Middle East over the
next five years.
One of Darden’s brands, LongHorn
Steakhouse will likely perform well in fiscal 2011 on the back of
increased media support and promotion as well as remodelling.
Incidentally, remodeling initiatives had also benefited Darden’s
yet another brand, Red Lobster. Hence, the company has decided to
give a new look to one of its struggling core brands, Olive Garden.
Management expects 2011 blended U.S. same-restaurant sales for Red
Lobster, Olive Garden and LongHorn Steakhouse to remain between1.5%
to 2%.
However, like all other restaurant
companies, inflationary pressure remains an overhang on Darden. In
order to mitigate the impact of rising costs, the company already
has most of its commodity needs locked in for fiscal 2011. This
offers good visibility on costs for the next quarter and augurs
well for Darden’s cost-saving initiatives. But management foresees
industry-wide increases in commodity and energy costs for fiscal
2012.
Additionally, dependence on core
brands Olive Garden and Red Lobster, which are approaching
saturation, will likely pose a threat to Darden. While Red Lobster
is wooing customers with a number of promotional activities, rising
sea food costs may restrain its margins. The U.S. restaurant
industry is still value sensitive. Hence, the failure of any
promotional offer will put pressure on the same-restaurant sales
growth. In the recently concluded third quarter, dishes featured in
Olive Garden promotion, especially in February, failed to be
accretive to the company’s growth. As a result, Olive Garden’s
same-restaurant sales in the third quarter equaled the prior-year
quarter but remained shy of management’s projection.
Zacks Consensus
Maintained
Over the last 30 days, the
magnitude of estimate revisions for Darden has remained unchanged
with estimates for fourth quarter 2011 and first quarter of 2012
being $1.00 and 91 cents, respectively.
Competition with restaurants like
Brinker International (EAT) and Red Robin
Gourmet Burgers Inc. (RRGB) is expected to remain fierce
regarding price, service, location and concept, leading to adverse
effects on the company’s restaurant operating margins and profits.
Darden currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating.
DARDEN RESTRNT (DRI): Free Stock Analysis Report
BRINKER INTL (EAT): Free Stock Analysis Report
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
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